RBA minutes - inside a meeting of two-handed economists

Pendal

August 2024

IF anyone complains about RBA transparency, they are not paying attention.

The minutes from the central bank's early August meeting were released today, though I am not sure minutes is the correct word - at 3,667 words, transcript might be a better term.

Together, with the post-meeting press conference, the RBA is putting its best foot forward in communicating with the public, as encouraged by the RBA review.

There was so much to say but so little confidence in anything.

Even the new Deputy Governor Andrew Hauser chose a recent speech to warn of false prophets and said we should have little confidence in any forecasts.

In the minutes we were treated to such gems as:

• "It was not possible to either rule in or rule out future changes in the cash rate."
• "Members will rely on the data and evolving assessment of risks to guide the Boards decisions."
• "Members observed that a range of uncertainties could influence the outlook for inflation, including the evolution of the labour market, household saving behaviour and the extent of spare capacity, as well as global geopolitical developments."

However, the one thing the RBA was keen to say is that if the Board was to do anything near term it is hiking - not cutting.

It believes there is less spare capacity in the economy than previously thought. If that does not improve, then inflation will be too slow to fall.

Very little spare capacity when GDP is barely growing?

Sounds like the Board still believes we have a supply problem. Otherwise, its message could be summarised as "we need a recession to beat inflation", which is a variation of Paul Keating's "recession we had to have".

I am not sure it would want that headline.

We disagree with the RBA's current concerns, finding more agreement with the ex-RBA chief economist - now Westpac Chief economist - Luci Ellis.

She describes the RBA as "skating to where the puck used to be" due to the fact that the RBA is focused on where the labour market was, not is.

Recent data showing increasing participation and supply, falling hours worked per person, and improving real incomes means the puck has moved.

In the months ahead, the RBA should be increasingly comfortable with labour market dynamics helping lower inflation. This should change its narrative and see it follow other central banks by cutting rates early next year.

Remember, the RBA stated in February 2022 that "while inflation has picked up, it is too early to conclude it is sustainably within the target range" and that "there are uncertainties about how persistent the pick-up in inflation will be as supply side problems are resolved".

In May 2022, it hiked.

Outlook

Markets for now are largely ignoring the RBA anyway. Three-year bonds remain near 3.5% and ten-year bonds finally seem to be holding just below 4%.

At these levels, bond markets are no longer super cheap but, at the risk of becoming a two-handed fund manager, they are also not expensive. It is important to remember the cycle has turned and, when that happens, yields will trend lower for an extended period.

Author: Tim Hext

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